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Facebook shareholders push for change, but Zuckerberg holds tight grip

A series of scandals has erased a fifth of its market value. Congressmen are calling for regulation. And its top executives have been on the defensive with a chorus of mea culpas.

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Growing scrutiny of Facebook Inc.'s handling of data breaches and platform concerns is renewing calls for chairman and CEO Mark Zuckerberg to relinquish some control over his company. While he has resisted, armed with voting control of the social media giant, pressure appears to be growing on Zuckerberg to give up the role of chairman and bring in an external leader to strengthen Facebook's governance.

It is an effort that has failed in the recent past. A similar shareholder proposal seeking an independent chair for Facebook was defeated in 2017. In a proxy filing detailing the Facebook board's opposition to the defeated independent chairman proposal, the company called such a move "unnecessary," adding that "forcing a division between our chairman and our CEO could harm our performance and be detrimental to interests of our stockholders."

Facebook's stock value has declined by about 22% for the year to date as of market close Dec. 7, as the firm has faced a myriad of controversies most notably involving the now-defunct data analytics firm Cambridge Analytica LLC, which improperly accessed millions of users' private data. Facebook's disclosures about Cambridge Analytica set off a storm of criticism from legislators and regulators around the world and led to a flurry of investigations.

Shareholder furor grows

A proposal to separate the CEO and chairman roles and hire an outsider to lead the board is expected to be on the agenda again for Facebook's 2019 shareholder meeting. The latest proposal was put forward by Trillium Asset Management LLC, an investment advisory firm that focuses on sustainable and responsible investing, which owns about a 0.001% stake in Facebook with 52,873 shares. Co-filers including the state treasurers of Illinois, Rhode Island and Pennsylvania, and the New York City comptroller.

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Zuckerberg owns about 12.6% of the total outstanding shares of Facebook, but because many of those shares are Class B, which come with 10-to-1 voting rights, he has a 53.3% voting stake in the company, giving him a majority say on all shareholder votes. Class A shares — the type that public shareholders may buy — have one vote per share. Including Zuckerberg's agreement with Facebook co-founder Dustin Moskovitz, which grants Zuckerberg proxy power over Moskovitz's shares, his voting power exceeds 60% in total. Excluding Facebook co-founders, the next largest stakes are held by institutional shareholders Vanguard Group Inc. and BlackRock Inc., both of which own over 5% of Facebook's total outstanding shares but can exercise only about 2% of the voting rights in Facebook.

Google LLC parent Alphabet Inc. has a similar share structure, with its 10-to-1 Class B shares providing company co-founders Larry Page and Sergey Brin collectively with over 50% voting power in their company. Alphabet has long operated with an independent chairman, however, with technology industry veteran Eric Schmidt brought on in 2001 to provide "adult supervision" as Google's founders once famously described. Alphabet lead independent director John Hennessy succeeded Schmidt as executive chairman in 2018. Many other big tech firms also have independent chairs, though that was not always the case.

Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management, said that an independent chair would "empower" Facebook's board and allow the company to regain the trust of its users and employees, as well as lawmakers and regulators.

"If we are putting that much weight in one person for a company of this significance, what are we really saying about how deep the bench runs at Facebook?" Kron said in an interview. "That's not healthy from a corporate governance point of view."

Shareholder proposals to eliminate Facebook's dual-class shares structure also have been defeated at each of Facebook's previous five annual shareholders meetings, including its last meeting in May 2018. In proxy filings defending the dual-class share structure, Facebook management said it enables the company "to focus on its long-term vision without being distracted by short-term pressures."

Stifel analyst Scott Devitt said in a recent research note that bringing in a "well-respected" external leader could help Facebook move past its current credibility struggles. Facebook has received continued backlash following reports about its handling of data breaches and the spread of misinformation on its platform over the past few years. However, in order for significant change to occur, Zuckerberg must view a management shift "not as defeat, failure, or an admission of fault, but as the best thing for the business going forward," Devitt said.

"The probability of change at the top of Facebook is low. We, however, would view change as a positive catalyst for the stock and accretive to long-term shareholder value," Devitt wrote.

Regulatory risk rises

Illinois State Treasurer Michael Frerichs, who supports the proposal for an independent chairman, said Facebook's governance structure puts investors at risk and insulates Zuckerberg from public accountability.

"Facebook has lost billions of dollars in value [in 2018], and I think a lot of that has to do with the scandals that were poorly handled with its current governance structure," Frerichs said in an interview. "Bringing in an outside perspective could help mitigate that risk."

The company's latest privacy-related PR debacle came in December following the release of internal company correspondence that U.K. officials said show Facebook leveraged user data as a bargaining chip to increase traffic from third-party apps, shared personal user data such as telephone and text activity without users' knowledge and limited accessibility to its platform for competing apps. Facebook responded by saying the leaked documents represented a partial record and were compiled by an app developer with a bias against the company.

Stifel's Devitt in a Dec. 5 note lowered his rating on Facebook shares to "hold" from "buy," saying that the firm's management team has created "too many adversaries — politicians/regulators, tech leaders, consumers, and employees — to not experience long-term negative ramifications on its business."

In the U.S., legislators from both political parties have renewed calls for stricter regulations of Facebook and its big tech peers in response to claims made in a November article from The New York Times about Facebook's lobbying efforts and relationships with lawmakers. The article alleged that Facebook had sanctioned a strategy by an outside public relations firm to plant negative stories about its competitors, including Google and Apple. It also said Facebook ramped up communication with key legislators on Capitol Hill over the past few years as the company's troubles mounted.

In a blog post, Facebook's outgoing Head of Communications and Policy Elliot Schrage accepted responsibility for the company's work with a public relations firm known as Definers, but denied claims that Facebook had asked Definers to spread misinformation about its competitors.

U.S. Rep. David Cicilline, D-R.I., tweeted Nov. 14 that Facebook "cannot be trusted to regulate itself," adding, "It is long past time for us to take action." Cicilline has aired similar criticisms in the past, saying at a congressional hearing in July that Facebook and its peers have offered too much leeway to extremist content on their platforms in response to claims of political bias. Cicilline is the ranking member of the House Judiciary Committee's antitrust subcommittee.

Given the increasing likelihood of regulation for big tech companies in the U.S., an independent board chair could provide Facebook with a fresh perspective that would help the firm prepare for more stringent laws, said Betsy Atkins, CEO and founder of venture capital firm Baja LLC, in an interview.

"It's better to be proactive rather than reactive, and having an independent chairman might enable the Facebook board to engage more directly on the pros and the cons of the inevitable regulations Facebook faces," Atkins said.